Case Studies

What is Merchandise Planning?

Ask a dozen retailers "What is merchandise planning?" and you will get at least a dozen different definitions. This is because it can be difficult to limit, and therefore to define, its scope. If we are going to create a short definition of the term it will have to be a generalised one. That way we can apply it to the whole range of activities that our twelve experts would include.

Merchandise Planning then is "A systematic approach. It is aimed at maximising return on investment, through planning sales and inventory in order to increase profitability. It does this by maximising sales potential and minimising losses from mark - downs and stock - outs."

That gives us a broad-brush definition. Let's now take a look at these ideas in detail.

It is a "systematic approach" in many ways. You need the systems to ensure that you have the right people, the right processes and the right computerised support. Without the people and processes you will get nowhere. The software available is merely an enabler - the final piece of a jigsaw.

It is "aimed at maximising return on investment", but where is this investment made? Most obviously we are talking about a financial outlay in stock, but less evidently there is also considerable financial investment in retail space, people and corporate infrastructure. Again, whilst financial investment is the most obvious type, we should not overlook the "opportunity cost" of the investment in time that is required by planning.

We achieve the goals "through planning sales and inventory". These two elements are inextricably linked and finding an optimum balance is the key to retail success. We are doing more here, though, than merely calculating a purchase quantity. We need to balance carefully the requirement to support sales with the constraints and tensions imposed by store layouts and warehousing and transportation issues.

We put the effort into Merchandise Planning "in order to increase profitability". Profitability is the key driver of most businesses. Effective merchandise planning delivers margin increases directly to the bottom line. We achieve the increase in profitability "by maximising sales potential and minimising losses from mark - downs and stock - outs". There are two major areas of profit leakage in retail. Firstly lost sales resulting from lack of stock and secondly forced margin reductions due to excessive stock.

If we can provide systems that can help us to identify and support the winners whilst diverting resources from the losers that suck the profit from the business then we shall be successful. A typical retail clothing business will lose about 15% of its turnover in markdown and perhaps 10% due to lost sales. If we assume a turnover of £100 million, then we are looking at a loss of £25 million here. Reducing each of these figures by 1%, adds £2 million to the bottom line. What is equally important it that this profit increase can be delivered in a sustained way. That is "Merchandise Planning".